A World Awash In Cheap Oil

Many environmentalists had assumed that if neither fear nor reason helped us to lessen our reliance on oil, then at least we could count on scarcity. But scarcity is not an economic or environmental policy. Humans have long had a habit of expecting the sky to fall. Yet from Malthus to Paul Ehrlich, predictions that the planet was on the verge of starvation have never come to pass (or at least not as broadly as expected). Nonetheless, the drop in oil prices comes at a terrible moment. Last month the Intergovernmental Panel on Climate Change reported that our only chance to halt the rising temperature of the Earth, and to prevent the calamity that rise will cause, would be to eliminate fossil-fuel emissions by the end of the century.

A plan to end U.S. fossil-fuel dependence would be an unlikely goal in any case, but, if oil remains easily accessible, it becomes politically impossible. “It is technically feasible to transition to a low-carbon economy,” Youba Sokona, the co-chair of one of the I.P.C.C.’s working groups, says. “But what is lacking are appropriate policies and institutions. The longer we wait to take action, the more it will cost to adapt and mitigate climate change.”

During the last decade, even as alarums about the advent of “peak oil” grew ever more frenzied, world oil production actually increased from 77.6 million barrels per day in 2003 to 86.8 million barrels per day in 2013. Lynch’s book The “Peak Oil” Scare and the Coming Oil Flood, scheduled for publication this coming spring, predicts even larger leaps in the global production of crude. Lynch thinks world oil production will increase to around 110 million barrels per day during the next decade. In the meantime, global oil prices will hover around $60 per barrel over the next couple of years and conceivably drop to $40 per barrel in five years. At $40 per barrel, the price of oil would, in inflation-adjusted dollars, just about equal the annual average price of $17 per barrel in 1998.

I asked Lynch if this meant oil markets might be in for a replay of the price collapse that occurred in the 1980s. He replied that he thought so. In inflation-adjusted dollars, the price of oil reached its peak annual average of $106 per barrel in 1980 and then collapsed to an annual average of $30.80 per barrel in 1986.

Jordan Weissmann sees some advantages to the low prices – beyond more money in the pockets of consumers:

Right now, the band of small and midsized oil companies that have fracked their way to riches aren’t the most efficient or strategic bunch. As one executive put it in 2010, the early days of the boom were mostly driven by “brute force and ignorance” as drillers tried to get crude out of the ground as fast as possible. That approach has led to lots of poorly structured wells that quickly run dry on oil and wasted effort fracking shale deposits that don’t produce much to begin with. When prices for oil were lofty, the industry could afford to be that sloppy. With prices sinking, however, it will be forced to improve its methods. That could be good for the environment. Fracking involves pumping a toxic mix of water, chemicals, and sand into shale deposits to crack them, and the more sparingly it’s used, the fewer problems it creates. A more cautious industry could also be good for investors, who would see less of their money sunk into failed wells.